Deciding what kind of car insurance you need can be confusing. When purchasing car insurance, you should take into account whether your car is new, used, and/or still under financing. There are three types of car insurance: liability insurance, collision insurance, and comprehensive insurance.
Liability insurance is car insurance that covers bodily injury or property damage that you cause to other people that are not in your car at the time of the accident. All states require drivers to obtain some amount of minimum liability coverage.
The other two types of car insurance, collision and comprehensive, are not required by law. Collision coverage covers damage to your car when your car hits, or is hit by, another vehicle or object. Comprehensive coverage may also be referred to as "other-than-collision" coverage (or OTC) and protects you from theft, fire, hail, vandalism, and other damage. Comprehensive coverage can be purchased on its own, but collision requires that you also have comprehensive coverage.
When deciding what kind of car insurance to purchase, first consider whether or not you own your car outright. If you owe money on your car, then buying only liability insurance is not an option. The company that is financing your car will require you to carry full insurance, including both collision and comprehensive coverage. This is because if your car is stolen or totaled, the company will no longer have any collateral on your car loan.
One thing to consider is the value of your car and how much it would cost you to replace it. For example, let's say that you own an older car that has a blue book value of $2,000. If comprehensive coverage with a $500 deductible would add $100 a month to your car insurance premium, you would probably be better off saving that money in a savings account that you could access if something happened to your car and you needed to replace it. In just over a year, you would be able to save the benefit that your insurance would pay should something happen; if nothing does happen, you are able to keep the money.
However, if you owned a new car with a value of $30,000 and did not have any car insurance other than the required liability coverage, you would lose the entire value of the car if it were stolen or destroyed in an accident. In this case, purchasing full coverage makes sense.
Whether you decide to purchase liability only or full coverage, it is important to shop around for various car insurance quotes. Ensure that you're paying the lowest possible price for the car insurance coverage you need.
